The Weakest Link is Weakening

Posted by Larry Doyle on March 2, 2009 6:00 AM |

The other day I highlighted the fact that 12 eastern European countries would solicit a bailout from the European Union over the weekend in Brussels. I defined this bloc of eastern European countries as currently the Weakest Link in the global economy. Well, if they were the weakest link then they just got weaker as they were rebuffed in their request for aid.

The dynamic at work in the weekend’s emergency meeting held in Brussels is a play on beggar-thy-neighborpolicies implemented during times of economic stress.

There are actually a number of factors influencing the European Union’s refusal to provide bailout money to these eastern European nations. Included in these factors are the following:

1. lack of coordination even within the eastern European countries themselves. Certain countries, such as Poland, are in better shape than others. Beggar-thy-neighbor within a beggar-thy-neighbor framework!!

2. a desire by some of these eastern European nations to accelerate their formal acceptance into the European Union fell on deaf ears. The acceptance into the EU would have helped them gain the stability of the common currency, the Euro.

3. problems within the EU itself as certain countries, such as Ireland and Portugal, are already massively stressed with their own financial problems.

Where do these eastern European countries go now to get help? They will likely solicit the IMF, International Monetary Fund initially. The IMF is already hard strapped for funding.

While the EU Rejects a Rescue of Faltering Eastern Europe, my concern is that ultimately this stress will cause the eastern European nations to become more isolated from their western European neighbors. In the process of aligning themselves more with their Asian neighbors to the east, we may see heightened political tensions and instability as well. It may be premature to make the assumption that this situation ultimately leads to increased politcal tensions in this part of the world, but that assumption is not a stretch by any means.

Clearly in the German mindset is the desire to maintain strict support for its currency, the Euro. I can never get away from the fact that embedded deep in the German culture is the experience of hyperinflation after the Weimar Republic. That experience was truly the precursor to the German fascist state, which led to WWII.

It is very conceivable that we will see other political changes develop during this time of turmoil. I will be monitoring in an attempt to help us all navigate the economic landscape.